Business investment in Britain is at a four-year low, undercutting ambitions by the government to modernise British industry and boost productivity.

The Office for National Statistics (ONS) announced that revised seasonally adjusted business investment in the first three months of 2002 was �26.5bn, 3.1% down on the previous quarter, and down 8.9% year on year.

Investment fell across all sectors, including construction, manufacturing, and services, and there was a particularly marked drop in investment in computer software.

Spending on IT was down 25%, while investment in manufacturing reached a seven-year low.

David Frost, acting director general of the British Chambers of Commerce, said:

"Margins are so tight for manufacturers to remain profitable that something has had to give, and clearly that has been investment."

The uncertain business climate, with the worldwide declines in stock markets inhibiting economic recovery, has also made firms less likely to embark on ambitious investment plans.

According to official figures, the UK economy did not grow at all in the last six months to March.

Productivity drive

The decline will make it more difficult for UK industry to close the productivity gap with other countries.

Most studies show that productivity - the key to long-term prosperity - is 20% to 40% lower in the UK than France, Germany or the United States.

Boosting business investment has long been a priority of the UK Treasury, which sees spending on technology as a key measure in increasing British productivity.

The Chancellor made much of his desire to boost the UK's productivity in his recent Mansion House speech, with measures designed to stimulate research and boost the skills of the workforce.

Last year a report from the Institute for Fiscal Studies argued that peculiarities in statistical methodology meant that government figures were consistently overestimating business investment.